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Canadian Ice Wine Production: A Case for the Use of Weather Derivatives*

Published online by Cambridge University Press:  08 June 2012

Don Cyr  and
Martin Kusy
Don Cyr
Affiliation:
Department of Finance, Operations and Information Systems, Faculty of Business,Brock University, 500 Glenridge Avenue, St. Catharines, Ontario,Canada L2S 3A1, Tel: 905–688–5550 (ext 3136), e-mail: [email protected]
Martin Kusy
Affiliation:
Department of Finance, Operations and Information Systems, Faculty of Business,Brock University, Brock University, 500 Glenridge Avenue, St. Catharines, Ontario, CanadaL2S 3A1.
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Abstract

Weather derivatives are a relatively new form of financial security that can provide firms with the ability to hedge against the impact of weather related risks to their activities. Participants in the energy industry have employed standardized weather contracts trading on organized exchanges since 1999 and the interest in non-standardized contracts for specialized weather related risks is growing at an increasing rate. The purpose of this paper is to examine the potential use of weather derivatives to hedge against temperature related risks in Canadian ice wine production. Specifically we examine historical data for the Niagara region of the province of Ontario, Canada, the largest icewine producing region of the world, to determine an appropriate underlying variable for the design of an option contact that could be employed by icewine producers. Employing monte carlo simulation we derive a range of benchmark option values based upon varying assumptions regarding the stochastic process for an underlying temperature variable. The results show that such option contracts can provide valuable hedging opportunities for producers, given the historical seasonal temperature variations in the region. (JEL Classification: G13, G32, Q14, Q51, Q54)

Type
Articles
Information
Journal of Wine Economics , Volume 2 , Issue 2 , Fall 2007 , pp. 145 - 167
Copyright
Copyright © American Association of Wine Economists 2007

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